Embezzlement . . . What Went Wrong? (E2)
Acts of Embezzlement can and does cripple and destroy entire organizations, whether it be – the smallest little league operation or largest multi-billion dollar corporation, medical facility or private practice, school or university, religious or non-profit organization, law enforcement or government agency.
All organizations, without exception, are vulnerable to acts embezzlement. Perhaps you think this is not totally the case. For example, you may believe that these crimes are less likely to be perpetrated on government organizations – that government agencies have sufficient antifraud technology, internal controls, and audit programs in place to either prevent or quickly identify internal crimes. Not so. Municipal, state and federal agencies are just as vulnerable as other organizations. There is plenty of evidence to support my statement. As you probably learned by now, I like to use actual cases (true names omitted) to make my points. Here are four embezzlement cases involving government agencies:
City Government, West Coast: Two long-term city government employees allegedly masterminded a an embezzlement/fraud scheme that netted them and accomplices more than $200,000 over a period of four years. In addition, “the two employees are accused of defrauding the city out of tens of thousands of dollars in labor costs by having government employees do private work for them on city time,” authorities said. The schemes were uncovered when a “whistle blower” went to authorities. In total, five government employees and two workers for city-approved vendors were charged.
County District Clerk’s Office: An accounting employee in the County District Court Clerk’s Office has allegedly made a plea deal with federal authorities indicating that she will enter a guilty plea to eleven counts of embezzlement totaling over $600,000. One of those counts alleges that this employee used her office’s accounts payable system to generate and transfer checks from the Court Clerk’s bank account to fraudulent bank accounts she had created.
City Government, East Coast: A former treasury worker who allegedly stole over $500,000 from public funds was indicted along with nine accomplices on larceny charges after allegedly writing city-funds checks to her accomplices over a period of 19 months. A city official later announced, “The city plans to purchase new computers to track financial data.”
City Government, Midwest: An Acting United States Attorney announced that a former street department superintendent, his wife and another former city worker have been indicted on fifty-one counts by a federal grand jury for a series of mail-fraud and money-laundering schemes totaling more than $756,000. Allegedly, over a period of four years the couple used three dummy corporations to disguise a massive embezzlement scheme against the city.
State and federal government: Whereas I have specifically pointed to fraud at city and county level because these sometimes escape our individual attention, as taxpayers we are all painfully aware of embezzlement and financial fraud that has occurred higher up, within our state and federal government systems. Sadly, such crimes are endemic.
The following highly costly long-term government-related case exemplifies, quite typically, the simplicity involved:
An alert bank official notified the authorities after becoming suspicious of two government check deposits. This banker’s uneasiness sparked an investigation that led to the arrest and conviction of a city government employee who had embezzled $48 million from the taxpaying public over an 18-year period. In criminal court when presenting their evidence, prosecutors described the methods the perpetrator used in this scheme as “simple.” They also declared that a number of very visible warning signs — described as obviously mismatched mailing labels pasted carelessly over payee names on checks, fraudulent identifier numbers, and noticeably misspelled company and individual names — went unquestioned as they moved throughout the system. The prosecutors also reported that allegedly in one instance, an outside auditor examined at least one fraudulent check and its voucher and failed to identify this scheme.
Method of Scheme:
Two prominent issues stand out in the above case. First, the above crime was committed by an individual holding a supervisory position. Next, it was obvious from the number of easily identifiable mistakes presented in court as evidence, no one was “auditing” or even casually spot-checking the supervisor’s work.
No single employee should be allowed to both initiate and process a financial transaction without extremely close supervision/oversight. This true case history should serve as a “red alert” for every manager in every organization. Embezzlement is so easy in organizations that do not have appropriate antifraud processes firmly in place. Unfortunately, many managers mistakenly refrain from putting into practice a few critical internal controls while entrusting their operations’ highest-risk financial tasks to employees they perceive to be loyal and trustworthy. The “old way” of preventing these crimes is clearly not good enough.
Over the years many of those senior management personnel with whom I talked with acknowledged that an act of embezzlement could possibly happen inside of their operation. However, the greater majority had insufficient knowledge when it came to understanding embezzlement. They did not know how such risks occur, which practices are most vulnerable, or what actions they should take to reduce their vulnerability to this crime. Several said that they preferred to focus their attention elsewhere and ignore this issue altogether until a questionable situation arose. Unfortunately, in all probability, by that time it would be long after the fraud began. Financial losses would almost certainly have escalated substantially. Once this point is reached — as very real situations have shown — even the survival of the organization is most likely in doubt.
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